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Implied volatility for front-month NYMEX crude options was hovering Tuesday around its highest level since March, reflecting market jitters before Wednesday’s highly anticipated OPEC meeting.
Front-month implied volatility Tuesday afternoon was 65%, a high not seen since mid-March and up from less than 40% in early November, according to data provider GlobalView.
Implied volatility, seen as a gauge of the cost of crude options and in turn, the level of risk in the market, has spiked as traders seek price protection ahead of what could be the first coordinated OPEC supply cut since 2008.
This uncertainty has had traders piling into out-of-the-money calls and puts. The most popular strike — the $55/b call — saw open interest jump by 7,235 contracts to 30,640 contracts on November 21. Open interest remained around that level through Monday.
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Open interest in the $60/b call spiked Monday by 11,037 contracts to 30,023 contracts, making it the next most popular strike. Open interest data is delayed one day. A call provides the owner with the right, but not the obligation, to buy underlying futures at a predetermined strike price.
Open interest in the most popular strikes — the $35/b put and $40/b — has increased steadily the last few weeks. As of Monday, open interest equaled 27,322 contracts and 26,038 contracts, respectively. A put provides the owner with the right, but not the obligation, to sell underlying futures contracts at a predetermined strike price.
A large amount of open interest around the $40/b put could exacerbate the decline in oil prices if OPEC cannot deliver a deal Wednesday, Goldman Sachs said in a note this week.
Oil could initially dip below $40/b, but prices should return above that mark considering the market has already positioned for OPEC not getting a deal done, as evidenced by Brent futures and options, Goldman said.
«With the Brent market in our view only pricing in a 30% probability of a deal being reached and the option market pricing in a $6/b move, we believe that a move to below $40/b would be difficult to sustain. This suggests that price risk is likely skewed to the upside heading into Wednesday,» it said.
Prices could run up to the low $50s/b on news that OPEC finalizes its proposed cut to 32.5 million b/d, while another consequence would likely be a drop in implied volatility, Goldman said.
If OPEC does cut production, the demand for crude options from oil producers would likely ease alongside concerns about lower prices, which in turn would help dampen implied volatility.
Citi Research analysts said Tuesday that OPEC members want to conclude a supply agreement, but that Saudi Arabia is «willing to walk away from a deal» unless the conditions are right.
«Our belief that the Saudi threat is credible, and that the Iranians [and] Iraqis are aware of this, is why we think a deal gets done,» they said.
–Geoffrey Craig, geoffrey.craig@spglobal.com
–Edited by Jason Lindquist, jason.lindquist@spglobal.com
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